When you have a poor credit rating, you may not be able to borrow money for things that you need, says Patricia White, executive director of Toronto-based Credit Counselling Canada. And bad credit limits you: "Some employers require a good credit rating and it may be difficult to rent an apartment or start a business with a negative credit history," says White.

Bad credit can affect everyone at some point in their lives. To make sure you are not one of them -- or to fix your credit if you're already in the hole -- here are the basics on what's considered a bad credit rating, how credit gets "bad" in the first place, the dangers and how to get back on track.

What does it all mean?
A credit rating measures credit worthiness or the consumer's ability to pay back a loan, says Elena Jara, education co-ordinator at Credit Canada in Toronto. Each loan, credit card or line of credit is rated and appears on your credit report.

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A credit report is created for anyone who borrows money or applies for credit from a financial institution, says White. The report includes personal information such as your name, current and previous addresses, birthdate and employers. "It also includes details of how much you owe and how you pay your debts," she says. "This information is provided by banks, retail stores and finance companies to the credit reporting organizations." In Canada, the two reporting agencies are Equifax Canada and TransUnion Canada.

What is considered a bad credit rating?
The credit rating system starts at zero (which means it is too new to rate) and goes to nine, explains White. A rating of one is the best rating a consumer can have: this indicates you are paying on time as agreed. "As soon as you miss one payment, the rating is lowered to two and can go to a five meaning that you are 120 days past making your payment, but are not yet considered a nine." Accounts placed for collection or that the creditor considers to be a bad debt will be rated a nine along with bankruptcy, she adds.

Bad credit happens -- but how?
Both missing payments and making late payments will affect your credit, says Tamara Kelly, director of education for Credit Counselling Services of Atlantic Canada in Saint John, N.B. "Some other things that can affect your score are having high balances, being maxed out and the number of places recently inquiring on your credit."

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